UK hedge, private equity funds seek legal advice on life under Labour

LONDON (Reuters) - British hedge and private equity funds are seeking detailed legal advice over how to deal with any return to power of the opposition Labour Party, which has shifted sharply to the left since it was last in government.

While no parliamentary election is scheduled until 2022, lawyers involved in the discussions said the funds want analysis of how Labour’s taxation, nationalisation and other policies might affect their operations or their managers personally.

At least 12 hedge funds and one private equity fund, each managing more than $1 billion in assets, have requested bespoke advice, nine leading London-based specialist funds lawyers told Reuters, without naming their clients for reasons of confidentiality.

Two funds are already taking precautionary action which would allow managers to move and work from abroad.

The inquiries have been made in recent weeks, although they predate a poorly received agreement on Britain’s exit from the European Union announced last week that has raised speculation about the Conservative government’s longevity and the possibility of a snap election.

The prospect of a left-wing Labour government run by veteran activist Jeremy Corbyn has raised concerns - real or imagined - about just how tough a line he would take on the financial industry.

“It’s part of every conversation I have with an alternative asset manager with UK operations, now,” said one partner at a law firm based in London.

“Views range from scepticism as to whether Corbyn is a problem, to outright conviction that Corbyn will happen and it’s a problem – for tax, capital controls, currency volatility.”

Since Corbyn became leader three years ago, Labour has adopted policies which contrast sharply to those implemented when it was in power from 1997-2010. Polls now show Labour neck and neck with Prime Minister Theresa May’s Conservatives.

As well as a higher income tax bill, the fund managers are concerned about the threat of nationalisation across various sectors, possible taxes on their businesses and investments, or the creation of other taxes aimed at the super-rich - even though details on some of Labour’s plans remain scant.

Run largely as partnerships, star hedge fund performers earn some of the highest base salaries in financial services plus a bonus that in good years can dwarf that achieved over a lifetime for the average worker.

“Anybody who’s a high earner is potentially going to take a hit,” said Neil Robson, regulatory partner at Katten Muchin Rosenman.

Average base salaries for senior fund managers are around 160,000 pounds, data from salary benchmarking firm emolument showed. That compares with a national average wage of just under 30,000 pounds, latest government statistics show.

Addressing business leaders recently, Corbyn struck a conciliatory tone. “I don’t have a problem with people doing well at all... quite the opposite,” he said, but added that they needed to pay a fair amount in taxes.

Labour declined to give additional comment when contacted by Reuters.

BREAKING GLASS

Labour plans to tax annual personal income above 80,000 pounds at 45 percent instead of the current 40 percent, and that above 125,000 pounds at 50 percent, up from 45 percent for earnings above 150,000 pounds currently.

With Labour aiming to increase spending across public services, some fund managers fear the upper band may have to rise further, recalling how in France Socialist ex-president Francois Hollande briefly imposed a 75 percent ‘wealth tax’.

Others are worried that a Labour government could tax other assets such as property held by high earners abroad.

Katten’s Robson said the possibility of additional taxes was a “significant cause of disquiet”, even though Labour has yet to announce any such plans.

Of the funds which paid for Corbyn impact-analysis, two were restructuring operations in preparation by creating overseas entities to which members of senior management could relocate, if needed, their lawyers said.

Samuel Brooks, partner at Macfarlanes, likened the moves to setting off a fire alarm. “It’s putting in place ‘break-glass-here-in-case-of-Corbyn planning’ — break glass, pick up the pen and sign the documents and then you’re done,” he said.

As small businesses, most hedge funds would probably avoid being caught by a Labour promise to make “larger” firms pay more corporate tax, although private equity firms’ investments may not be so lucky.

Chief among private equity’s concerns is a Labour plan to renationalise sectors including water, energy, rail and recently listed Royal Mail. It also wants to force companies with more than 250 staff to give a 10 percent equity stake to employees.

That could hit companies across the country and radically change the economics of existing investments for many managers.

Others fear Labour could raise the tax on profits on their investments stored up over many years and payable when the underlying assets are sold, although the party has not mentioned plans to do so.

Additional reporting by Andrew MacAskill and William James; editing by David Stamp